The charts in this book are based primarily on data available as of March 2011 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of the federal government to 2010 while the charts using CBO data display both historical and projected growth from as early as 1940 to 2084. Projections based on OMB data are taken from the White House Fiscal Year 2012 budget. The charts provide data on an annual basis except… Read More
Authors
Emily GoffResearch Assistant
Thomas A. Roe Institute for Economic Policy StudiesKathryn NixPolicy Analyst
Center for Health Policy StudiesJohn FlemingSenior Data Graphics Editor
Milton Friedman clears up misconceptions about wealth redistribution, in general, and inheritance tax, in particular. http://www.LibertyPen.com
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Many times in the past our government has tried to even the playing field but the rich and poor will always be with us as Christ reminded us so long ago. Providing people a chance is fine but trying to punish others is not and it does not work.
She’s joined a corporate board, gotten a job as a correspondent for NBC and has her pick of gatherings of the mighty or simply important just about anywhere on the globe.
Reactions tended to fall along partisan lines. Fans of Bill and/or Hillary Clinton were happy for their 31-year-old daughter. Non-fans weren’t impressed. She’d done nothing to deserve her good fortune except choose good parents, they said. The really ugly ones criticized everything from her hairstyle to her speech.
I’m not impartial on the subject. I’ve known Chelsea since she was an infant, though most of my exposure came before her move to Washington in junior high. She’s remained friendly with my daughter and has been good to her. That’s enough for me.
But Chelsea is smart and poised. She’s worked hard at demanding schools and jobs. Would she be precisely where she is today without her famous parents? Of course not. She hasn’t claimed otherwise. (I do like how often she credits her Grandmother Rodham for sage advice.)
But she now has made the important decision to accept inheritance of her parents’ considerable public franchise. If nothing else, her growth in the larger public world might position her to someday take leadership of the Clinton Foundation. If she’s lucky — if we’re all lucky — she will continue to amass the resources her father has raised for fighting significant global problems. If she should decide to try politics, she’s been homeschooled by the best and brightest.
Make no mistake. Chelsea Clinton is a one percenter, if not precisely in the net worth category, close enough. She is also, if you prefer, a lucky sperm club member. But she manages to send a signal that she understands how much of her stature is owed to her parents. She signals a generosity of spirit about her good fortune that is more reminiscent of a Buffett than a Koch.
We will always have the 1 percent. There’s nothing inherently evil about being in that small number. The question is how much the 1 percent is willing to allow the 99 percent to share.
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Milton Friedman discusses the inheritance of talent on “Free to Choose”
“The inheritance of talent is no different (from an ethical point of view) from the inheritance of other forms of property– of bonds, of stocks, of houses, or of factories. Yet many people resent the one, but not the other.”
From “Free to Choose” (1980), Part V: “Created Equal.”
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Burton Folsom, Jr. is a professor of history at Hillsdale College and author of New Deal or Raw Deal?, to be published by Simon & Schuster this year.
The subject of “equality” is the source of much political debate. Ever since the founding era, free-market thinkers have argued for equality of opportunity in the economic order. Equality, in other words, is a framework, not a result. In modern terms the goal is a level playing field. Government is a referee that enforces property rights, laws, and contracts equally for all individuals.
What the free-market view means in policy terms is no (or few) tariffs for business, no subsidies for farmers, and no racism written into law. Also, successful businessmen will not be subject to special taxes or the seizure of property.
In America this view of equality is enshrined in the Declaration of Independence (“all men are created equal and are endowed by their creator with certain inalienable rights”) and the Constitution (“imposts and excises shall be uniform throughout the United States” and “equal protection of the laws”). Much of America’s first century as a nation was devoted to ending slavery, extending voting rights, and securing property and inheritance rights for women—fulfilling the Founders’ goal of equal opportunity for all citizens.
Progressives and modern critics of equality of opportunity have launched two significant criticisms against the Founders’ view. First, that equality of opportunity is impossible to achieve. Second, to the extent that equality of opportunity has been tried, it has resulted in a gigantic inequality of outcomes. Equality of outcome, in the Progressive view, is desirable and can only be achieved by massive government intervention. Let’s study both of these objections.
To some extent, of course, the Progressives have a valid point—equality of opportunity is, at an individual level (as opposed to an institutional level) hard to achieve. We are all born with different family advantages (or disadvantages), with different abilities, and in different neighborhoods with varying levels of opportunity. As socialist playwright George Bernard Shaw said on the subject, “Give your son a fountain pen and a ream of paper and tell him that he now has an equal opportunity with me of writing plays and see what he says to you.”
What the Progressives miss is that their cure is worse than the illness. Any attempt to correct imbalances in family, ability, and neighborhood will produce other inequalities that may be worse than the original ones. Thomas Sowell writes, “[A]ttempts to equalize economic results lead to greater—and more dangerous—inequality in political power.” Or, as Milton Friedman concluded, “A society that puts equality—in the sense of equality of outcome—ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests.”
Failure During the New Deal
Sowell’s and Friedman’s point is illuminated by the failed efforts of the federal government to reduce inequalities during the New Deal. In the early 1930s the United States had massive unemployment (sometimes over 20 percent). In 1932 President Herbert Hoover supported the nation’s first relief program: $300 million was distributed to states. This was not a transfer from richer states to poorer states but a political grab by most state governors to secure all they could. Illinois played this game well and secured over $55 million, more than New York, California, and Texas combined.
Massachusetts, with almost as many people as Illinois, received zero federal money. Massachusetts had much poverty and distress, but Governor Joseph Ely believed states should try to supply their own needs and not rush to Washington to gain funds at someone else’s expense. Ely therefore promoted a variety of fundraising events throughout his state to help those in need. “Whatever the justification for [federal] relief,” Ely noted, “the fact remains that the way in which it has been used makes it the greatest political asset on the practical side of party politics ever held by any administration.”
In 1935 President Franklin Roosevelt confirmed Ely’s beliefs by turning the Works Progress Administration (WPA), which he had established, into a gigantic political machine to transfer money to key states and congressional districts to secure votes. Roosevelt and his cohorts used the rhetoric of removing inequalities as a political cover to gain power. Reporter Thomas Stokes won a Pulitzer Prize for his investigative research that exposed the WPA for using federal funds to buy votes.
The use of tax dollars, then, to mitigate inequality failed because—whatever the good intentions—the funds quickly became politicized.
Presidential (and congressional) authority to tax and to transfer funds from one group to another also proved to be a dangerous centralization of power. Taxation increased both in size and complexity. The IRS thus became a weapon a president could use against those who resisted him. “My father,” Elliott Roosevelt observed of his famous parent, “may have been the originator of the concept of employing the IRS as a weapon of political retribution.”
Sowell and Friedman indeed recognized that efforts to remove inequalities would create new inequalities, perhaps just as severe, and would also dangerously concentrate power in the hands of politicians and bureaucrats. But Sowell and Friedman have readily conceded that when markets are left free, the inequality of outcomes is not necessarily morally justified. In other words, some people—through luck or inheritance—become incredibly rich and others, who may have worked harder and more diligently, end up barely earning a living. Rewards, as F. A. Hayek, among others, has noted, are “based only partly on achievements and partly on mere chance.” Societies are more prosperous under free markets, but individual success and failure can occur independently of ability and hard work.
Progressive Claims in Light of History
What the historical record does seem to demonstrate is that the richest men in American history have been creative entrepreneurs who have improved the lives of millions of Americans and have achieved remarkable upward mobility doing so. For example, the first American to be worth $10 million was John Jacob Astor, a German immigrant and a son of a butcher. Astor founded the largest fur company in the United States, transforming tastes and lowering costs in clothing for people all over the world.
John D. Rockefeller, the first American to be worth $1 billion, was the son of an itinerant peddler. Yet Rockefeller, with little education or training, went into the business of refining oil and did it better than anyone in the world. As a result, he sold the affordable kerosene that lit up most homes in the world. (He had a 60 percent world market share in the late 1800s.)
Henry Ford, the son of a struggling farmer, was the second American billionaire. He used the cheap oil sold by Rockefeller and cheap steel that was introduced by immigrant Andrew Carnegie to make cars affordable for most American families. The most recent wealthiest men in the United States—Sam Walton and Bill Gates—both came from middle-class households and both added much value for most American consumers.
Free markets may yield odd results and certainly unequal outcomes, but the greater opportunities and prosperity have made the tradeoff worthwhile for American society.
President Obama and Republicans in Congress continue to wage war over an extension of the payroll tax cut. But missing from the debate is any discussion of comprehensive tax reform that would eliminate payroll taxes altogether.
Social Security and Medicare payroll taxes are the second-largest source of federal revenue, surpassed only by personal income taxes. This week’s chart from Heritage’s 2011 Budget Chart Book depicts federal revenue by source.
That chart would look quite different if Heritage’s tax-reform plan were enacted into law. That plan, part of the Saving the American Dream proposal, prescribes a single, low rate for individuals, replacing all federal income taxes, payroll taxes, the death tax, and most excises.
The business tax code will also be replaced by a new flat business tax, thereby giving all businesses equal treatment and providing the framework for them to compete better in global markets.
This simplified system enables taxpayers to anticipate their tax burden and plan accordingly. The Heritage tax plan encourages economic growth through a lower rate and by removing multiple taxation on the same income. Because the plan taxes income spent on consumption, it eliminates the disincentives families currently face to build savings. Enacting the plan would result in greater economic freedom and opportunity, and it would encourage Americans to be proactive in building financial security for themselves and their families.
With the failure of the super committee to recommend at least $1.2 trillion in deficit reduction, Congress’s latest attempt at budget control has collapsed. There will be many analyses of why the process did not work, but it’s worth stepping back to recall what generated the need for this extraordinary procedure and what the exercise actually produced.
From early in the year, it was generally accepted that the divided Congress would be unable to agree on a budget through regular procedures. Republicans chose to use a necessary vote on the debt limit to force the Administration to face the need for spending reductions. After a summer-long debate, rife with hyperbole about a potential government “default,” the Budget Control Act of 2011 (BCA) was born, crafted in a way that at face value expressed the goal of fiscal prudence.
The BCA both imposed a set of discretionary spending caps to limit annually appropriated spending and established the super committee to recommend policies that would reduce the deficit by at least an additional $1.2 trillion through 2021. In return, the BCA included debt limit increases in three tranches: $400 billion, $500 billion, and then $1.2 trillion, as the chart below illustrates.
The debt limit hikes were ostensibly contingent on deficit reduction and a vote on a balanced budget amendment to the Constitution. But in fact, under the language of the BCA legislation, they could be blocked only if Congress passed a joint resolution of disapproval. If passed, such a resolution would be subject to a presidential veto, requiring the usual two-thirds vote of both houses to override. Thus these debt ceiling increases up to $2.1 trillion were all but assured from the beginning. (Article continued below chart)
The first two increases totaling $900 billion have already occurred, and the debt limit now stands at an astounding $15.124 trillion. It is up from the $14.29 trillion limit set in early 2010 and follows a history of frequent and growing debt limit increases, as shown in this Heritage Budget Chart Book chart. (Article continued below chart)
The third increase of $1.2 trillion—projected to occur early in 2012 when the debt begins to again encroach upon the limit—would raise the debt limit to an unprecedented $16.324 trillion, or over 100 percent of GDP.
Thus, the debt limit will climb ever higher, accommodating the profligate spending of the President and Congress. As Heritage’s J. D. Foster wrote in January: “The need to raise the debt limit reflects an intention to continue deficit financing” and should signal to Congress that it should urgently reexamine its current policy decisions.
Policies that promote reckless spending—forcing the government to borrow about 40 cents of every dollar it spends, while pushing total debt past 100 percent of gross domestic product (GDP)—are flat-out irresponsible. This upward trajectory makes it crystal clear that the government’s spending priorities have deviated severely from what the Founders laid out in the Constitution.
Equally disappointing, both the existing spending caps and the automatic enforcement in the BCA are less than advertised. The caps contain flaws that may make them all but meaningless. The “sequester” mechanism that would impose spending cuts will not be triggered until January 2013, giving Congress plenty of time to rewrite or abandon it.
As The Heritage Foundation’s David Addington writes, “The overspending problem is still here. Congress must still act to get the federal spending under control, in a thoughtful, intelligent manner that meets the needs of the American people.” It should do this without succumbing to pressure to hike taxes on Americans and further weigh down an already struggling economy. Remember, the problem is Washington’s spending.
Congress should demonstrate that it is serious about tackling the problems of rising spending, debt, and deficits. That means reforms to Medicare, Medicaid, and Social Security; transforming the maddeningly complicated tax system; and reducing the size and scope of government. In Saving the American Dream, The Heritage Foundation offers the kinds of bold solutions needed to put America back on a path toward fiscal sustainability and economic prosperity.
Wow, this is remarkable. The alternative minimum tax (AMT) is one of the most-hated features of the tax code. It is such a nightmare of complexity that even Democrats routinely have supported “patches” and “band-aids” to protect millions of additional households from getting trapped in this surreal parallel tax universe – one that requires taxpayers to calculate their taxes two different ways, with the IRS getting the maximum amount of money from the two returns. (Hong Kong, by contrast, give taxpayers the option of calculating their taxes two different ways, but they’re allowed to pay the smaller of the two amounts.)
Notwithstanding the AMT’s status as arguably the worst feature of the internal revenue code, President Obama apparently wants to double down on this horrific policy by creating a new version of this nightmarish provision.
The administration’s principle resembles the Alternative Minimum Tax, which was first adopted in 1969 and was intended to hit the superwealthy. The AMT has been hitting an increasing number of the middle class because it wasn’t indexed for inflation, and Congress has continually wrestled with how to get rid of it.
The WSJ article also notes that a glaring inconsistency in the White House’s rhetoric. the plan is supposed to be a “very significant” tax hike, but doubling the tax burden on millionaires would only raise $19 billion per year. In other words, the Administration’s class-warfare rhetoric is probably just cover for a tax hike that actually will hit a lot of people with far more modest incomes.
The proposal also could apply to a broader selection of taxpayers—all households with incomes of more than $1 million. Those earners are expected to pay an average of $845,000 this year, according to the nonpartisan Tax Policy Center. Assuming the households in the group of 22,000 pay that amount, even doubling their tax burden would raise just $19 billion a year at a time when deficit reduction is being measured in trillions of dollars. That doesn’t take into effect any change in taxpayer behavior prompted by a new tax regime. A senior administration official said that depending on where the minimum rate is set, the plan could be a “very significant” revenue raiser. The official wouldn’t provide details. …Some conservative economists say such a proposal could put a drag on capital markets and ignores the fact that many companies have already paid tax on the income before it is distributed to owners as dividends or capital gains.
The New York Times, to its credit, provides a fair description of the issue (including a much-needed acknowledgement that Warren Buffett may not have been honest and/or accurate), and also suggests that Obama may be proposing to replace the existing AMT with this new version (though that presumably would negate its impact as a revenue-raiser).
Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday. Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments. …The administration wants such a tax to replace the alternative minimum tax, which was created decades ago to make sure the richest taxpayers with plentiful deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class.
Actually, the AMT also hits lots of middle-class families since having kids is considered a “preference” for tax purposes.
But that’s just an insult layered on top of injury. What makes Obama’s new scheme so destructive is that it would (though the White House has not explained the details) somehow classify dividends and capital gains as “preference” items – even though everyone acknowledges that such income already is double taxed!
In other words, Obama claims to be concerned about jobs, but he is proposing a big tax hike on the saving and investment that is necessary to create jobs. Amazing.
Regular readers will recognize this video about Obama’s class-warfare tax policy. But if you haven’t seen it, five reasons are presented to explain why it will backfire.
But look at the bright side. At least accountants and tax lawyers (and don’t forget bankruptcy specialists) will get more business if Obama’s plan is implemented.
This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest corruption of the internal revenue code. www.freedomandprosperity.org
Roby Brock’s Talk Business has a good report on Republican Rep. Davy Carter’s plan, as chair of the House Revenue and Tax Committee, to hold hearings next year on income tax reform in Arkansas.
Unlike many others in his party, Carter understands sensible reform isn’t all about cutting. He’d like to reshape income tax brackets in a “revenue neutral” way.
That can’t be done through income tax brackets alone, as a practical political matter. It would mean a new higher bracket for the wealthy or dramatic shifting of the overall income tax burden to higher income people. That’s not what Carter has in mind, however.
TAX REFORM TALK: From Rep. Davy Carter.
I am glad that Davy Carter is a conservative and will not consider raising the highest tax rate in Arkansas above 7%. That is crazy for several reasons but I will mention one of the most harmful. In 1970 when Dale Bumpers raised the top income tax rate in Arkansas to 7% it did not affect many people but as time has gone by now many are having to pay that top rate. That will happen again if the liberals are allowed to raise the top rate. It is a bait and switch operation. They promised in 1970 that not many would have to pay the 7% but that is not the case now!!!!
If you start ranking the great governors of Arkansas, you talk about Win Rockefeller on seminal reform and on brave advancements in race relations. You talk about Dale Bumpers on raising income taxes and reorganizing government and advancing free textbooks and child immunizations and two-year community colleges.
Mike Huckabee recently moved to Florida? Why? The answer is easy. Huckabee wants to avoid Arkansas’ high state income tax. Max Brantley of the Arkansas Times wants to call Huckabee a tax fugitive, but who can blame him.
Liberals like Brantley and Ernie Dumas want to praise former Arkansas governor Dale Bumpers for raising the state income tax to 7%, but that is the reason our state has the highest state income tax in the area (all bordering states have either lower state income taxes or no state income tax).
Is it any surprise that during the last census that the seven states that do not have an income tax grew in population?Arkansas has suffered from bracket creep and in 1929 you had to make 5 times the average wage to pay any state income tax at all, but now over 66% of tax payers in Arkansas pay at least some of their income at the 7% level.
Until Gov. Dale Bumpers raised income-tax rates and other taxes in 1971, Arkansas had by far the lowest per-capita state and local taxes in the United States. Afterward, we were still 50th but within shouting distance of 49th.
(June 2006) Democratic Gov. Dale Bumpers and the General Assembly raised Arkansas’ top income tax rate to “broaden the tax base” in 1971(1). Yet Arkansas’ per capita income, expressed as a percentage of the U.S. total, has barely improved, moving from 71 (1971) to 77.7 percent (2005) over the 34-year period, according to data from the U.S. Bureau of Economic Analysis. The 1971 income tax increase reversed a decades-long strong growth trend and left Arkansas with the highest income tax rate among bordering states (Mississippi, Missouri, Louisiana, Oklahoma, Tennessee and Texas).
Income Stagnation: The 1930s
One has to turn to the 1930s-the decade of the Great Depression-to find weaker income growth than in recent years.
Arkansas per capita personal income was 44 percent of the U.S. in 1929, the first year data was compiled in the BEA time series. The Great Depression started that year, and by the time it ended in 1933 Arkansas per capita income had fallen to 41 percent of the U.S. By decade’s end (1939) it had returned to 44 percent.
Growth Decades: The 1940s, 1950s & 1960s
Arkansas per capita income increased as a percentage of the U.S. in the next three decades.
In 1941, at the onset of World War II, Arkansas per capita income was 47 percent of the U.S. It was 59 percent at war’s end in 1945 and again in 1949. It was 56 percent in 1950, 62 percent a decade later in 1960, and 68 percent in 1969. If this growth rate had continued Arkansas would have exceeded 100 percent of the U.S. average in the current decade (2000-2009).
To summarize, Arkansas per capita income increased from 44 to 71 percent of the U.S. total between 1939 and 1971.
Anemic Income Growth (1971-2005)
The trend in recent decades is anemic growth in Arkansas per capita personal income. Fiscal policy changes affect economic behavior with a time lag. Arkansas per capita income was 71 percent of the U.S. in 1971 and 76 percent in 1973. Income growth stagnated for the rest of the decade, reaching 77 percent of the U.S. in 1979. It fell to 75 percent in 1989, and was 76 percent in 1999. Today, Arkansas per capita income, at 77.7 percent of the U.S., is barely above its high point of the 1970s.
Since its introduction in 1929, Arkansas‘ statutory incometax structure has changed very little. However, due to changes in the economy and in inflation, the real effects of that tax structure have changed substantially. This report looks at the effects that rising incomes and inflation have had on the Arkansasincometax structure. In addition, the report looks at the changing profile of Arkansas taxpayers in recent years, and provides a brief comparison ofArkansas taxes in relation to other states and the federal tax system.
Arkansas‘ IncomeTax Structure: Original and Revised
In 1929 Arkansas became 12th among the states to adopt an individual incometax. The structure contained five rates and net income brackets with a top rate of five percent applying to net income over $25,000. That original structure remained in place until 1971 when a new middle-income bracket was added and the rate on net income over $25,000 was increased to 7.0 percent. The rates and brackets revised in 1971 remain in place today. The 1929 original and the revised current tax structure are shown in Table 1.
Table 1 Arkansas Individual IncomeTax Structure
1929 Original Net Income Rate first $3,000 1.0% next$3,001 to $6,000 2.0% next$6,001 to $11,000 3.0% next $11,001 to $25,000 4.0% over $25,000 5.0% 1971 Revision (Current) Net Income Rate first $2,999 1.0% next$3,000 to $5,999 2.5% next$6,000 to $8,999 3.5% next$9,000 to $14,999 4.5% next $15,000 to $24,999 6.0% over $25,000 7.0%
Source: Arkansas Legislative Tax Handbook, 1992, Bureau of Legislative Research.
In 1975, the earliest year for which records on income tax collections by income group is available, only the top 4.0 percent of Arkansas taxpayers would have had any of their income subjected to the top 7.0 percent rate. By 1991, around 66.0 percent of the state’s taxpayers would have had some of their income subjected to this top rate–a rate once reserved for only the highest income earners.
The 1929 tax structure provided for exemptions of $1,500 for a single person and $2,500 for married individuals. In 1947 the state raised the exemption to $2,500 for singles and $3,500 for married persons. In 1957 the personal exemption was converted to a credit of $17.50 for singles and $35.00 for married persons. In 1987 the credits were increased to $20 per person. Finally, in 1991, low income Arkansans were exempted from paying incometax if their gross income did not exceed $5,500 for an individual or $10,000 for a married couple. For most taxpayers, the $20.00 credit remains in effect today.
The Value of Exemptions as a Share of Per Capita Income
Table 2 shows how the value of the personal tax exemption or credit has diminished over time. The figures shown represent the personal exemption or credit for a single individual as a ratio of the per capita personal income in the year in which the credit was first enacted. In 1929, for instance, an individual would have been exempted from any tax until their income reached a level which was equal to 490 percent of the Arkansas per capita income for that year. In 1947 with the first statutory change in the exemption, that individual would have still been exempted up to an amount equal to 340 percent of the per capita income level. By 1957 the value of the exemption (which was changed to a tax credit that year) had declined substantially, falling to 130 percent of per capita income. At the time of the next change in the personal credit (1987), the value of that credit was only 17 percent of the per capitaincome level. For most taxpayers (all those not officially classified as low income) in 1992, the value of the personal credit was only 13 percent of per capita income.
Table 2 Personal Exemptions and Credits As a Percent of Per Capita Income
Arkansas Year of Value of Per Capita Enactment ExemptionIncome Ratio 1929 $1,500 $ 308 490% 19472,500 737 340% 19571,6001,247 130% 19872,000 11,980 17% 19922,000 15,439 13%
Source: Arkansas Legislative Tax Handbook, 1992, Bureau of Legislative Research; Per capita personal income data is from the Bureau of Economic Analysis, unpublished data, April, 1993.
In other words, whereas in the first year of enactment of the incometax, the personal exemption would have allowed an Arkansan to earn almost five times the average per capita income before paying any tax.
Max Brantley went on another tyrade about raising taxes instead of cutting spending (“How to raise taxes,” Arkansas Times Blog, November 28, 2011). However, spending is the main problem and it appears that Democrats do not want to cut a dime. Instead, they blame Glover Norquist for all their problems.
WASHINGTON — Democrats are unanimous in charging that the debt-reduction supercommittee collapsed because Republicans refused to raise taxes. Apparently, Republicans are in the thrall of one Grover Norquist, the anti-tax campaigner, whom Sen. John Kerry, D-Mass., called “the 13th member of this committee without being there.” Senate Majority Leader Harry Reid helpfully suggested “maybe they should impeach Grover Norquist.”
With that, Norquist officially replaces the Koch brothers as the great malevolent manipulator that controls the republic by pulling unseen strings on behalf of the plutocracy.
Nice theory. Except for the following facts:
•Sen. Tom Coburn last year signed on to the Simpson-Bowles tax reform that would have increased tax revenue by $1 trillion over a decade.
•During the debt-ceiling talks, House Speaker John Boehner agreed to an $800 billion revenue increase as part of a Grand Bargain.
•Supercommittee member Pat Toomey, a Club for Growth Republican, proposed increasing tax revenue by $300 billion as part of $1.2 trillion in debt reduction.
Leading, very conservative Republicans proposing tax increases. So why does the myth of the Norquist-controlled anti-tax monolith persist? You might suggest cynicism and perversity. Let me offer a more benign explanation: thickheadedness. Democrats simply can’t tell the difference between tax revenue and tax rates.
In deficit reduction, all that matters is tax revenue. The holders of our national debt care not a whit what tax rates yield the money to pay them back. They care about the sum.
The Republican proposals raise revenue, despite lowering rates, by opening a gusher of new income for the Treasury in the form of loophole elimination. For example, the Toomey plan eliminates deductions by $300 billion more than the reduction in tax rates “cost.” Result: $300 billion in new revenue.
The Simpson-Bowles commission — appointed by President Barack Obama and endorsed by Coburn — used the same formula. Its tax reform would lower tax rates at a “cost” of $1 trillion a year while eliminating loopholes that deprive the Treasury of $1.1 trillion a year. This would leave the Treasury with an excess — i.e., new tax revenue — of $100 billion a year, or $1 trillion over a decade.
Raising revenue through tax reform is better than simply raising rates, which Democrats insist upon with near religious fervor. It is more economically efficient because it eliminates credits, carve-outs and deductions that grossly misallocate capital. And it is more fair because it is the rich who can afford not only the sharp lawyers and accountants who exploit loopholes but the lobbyists who create them in the first place.
Yet the Democrats, who flatter themselves as the party of fairness, are instead obsessed with raising tax rates on the rich as a sign of civic virtue. This is perverse in three ways:
1) Raising rates gratuitously slows economic growth, i.e., expansion of the economic pie for everyone, by penalizing work and by retaining inefficiency-inducing loopholes.
2) We’re talking pennies on the dollar. Obama’s coveted Bush tax cut repeal would yield the Treasury, at the very most, $80 billion a year — offsetting 2 cents on the dollar of government spending ($3.6 trillion).
3) Hiking tax rates ignores the real drivers of debt, which, as Obama himself has acknowledged, are entitlements.
Has the president ever publicly proposed a single significant structural change in any entitlement? After Simpson-Bowles reported? No. In his February budget? No. In his April 13 budget “framework”? No. During the debt-ceiling crisis? No. During or after the supercommittee deliberations? No.
As regarding the supercommittee, Obama was AWOL — then immediately pounced on its failure by going on TV to repeat his incessantly repeated campaign theme of the do-nothing (Republican) Congress.
A swell slogan that fits nicely with the Norquist myth. Except for another inconvenient fact: It is the Republicans who passed — through the House, the only branch of government they control — a real budget that cut $5.8 trillion of spending over the next 10 years. Obama’s February budget, which would have increased spending, was laughed out of the Senate, voted down 97-0. As for the Democratic Senate, it has submitted no budget at all for 2 1/2 years.
Who, then, is do-nothing? Republicans should happily take on this absurd, and central, Democratic campaign plank. Bring Simpson-Bowles to the House floor and pass the most radical of its three deficit-reduction alternatives.
Dare the Senate Democrats to vote down the grandest of all bargains. Dare Obama to veto his own debt commission. Dare the Democrats to actually do something about debt.
As an author who has just published a book on the crisis of Western civilization, I couldn’t really have asked for more: simultaneous crises in Athens and Rome, the cradles of the West’s law, languages, politics, and philosophy.
So why should Americans care about any of this? The first reason is that, with American consumers still in the doldrums of deleveraging, the United States badly needs buoyant exports if its economy is to grow at anything other than a miserably low rate. And despite all the hype about trade with the Chinese, U.S. exports to the European Union are nearly three times larger than to China.
Until March, it seemed as if exports to Europe were on an upward trajectory. But the euro-zone crisis has stopped that. Governments that ran up excessive debts have seen their borrowing costs explode. Unable to devalue their currencies, they’ve been forced to adopt austerity measures—cutting spending or hiking taxes—in a vain effort to reduce their deficits. The result has been Depression economics: shrinking economies and unemployment rates approaching 20 percent.
As a result, according to the new president of the European Central Bank, Mario Draghi, a “double dip” recession in Europe is now all but inevitable. And that’s lousy news for U.S. exporters targeting the EU market.
But there’s more. Europe’s problem is not just that governments are overborrowed. There are an unknown number of European banks that are effectively insolvent if their holdings of government bonds are “marked to market”—in other words, valued at their current rock-bottom market prices. In our interconnected financial world, it would be very odd indeed if no U.S. institutions were affected by this. Just as European institutions once loaded up on assets backed with subprime U.S. mortgages, so most big U.S. banks have at least some exposure to euro-zone bonds or banks. One institution—MF Global, run by former Goldman Sachs CEO Jon Corzine—just blew up because of its highly levered euro bets. Others are biting their fingernails because it is suddenly far from clear that the credit-default swaps they have bought as insurance against, say, a Greek default are worth the paper they are written on.
But the third reason Americans should care about Europe is more important even than the risk of a renewed financial crisis. It is the danger that what is happening in Europe today could ultimately happen here. Just a few months ago, almost nobody was worried about Italy’s vast debt, which amounts to 121 percent of GDP. Then suddenly panic set in, and Italy’s borrowing costs exploded from 3.5 percent to 7.5 percent.
Today the U.S. gross federal debt stands at around 100 percent of GDP. Four years ago it was 62 percent. By 2016 the International Monetary Fund forecasts it will be 115 percent. Economists who should know better insist that this is not a problem because, unlike Italy, the United States can print its own money at will. All that means is that the U.S. reserves the right to inflate or depreciate away its debt. If I were a foreign investor—and half the debt in public hands is held by foreigners—I would not find that terribly reassuring. At some point I might demand some compensation for that risk in the form of … higher rates.
Athens, Rome, Washington … The shortest route from imperial capital to tourist destination is precisely this death spiral of debt.
Niall Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. He is also a senior research fellow at Jesus College, Oxford University, and a senior fellow at the Hoover Institution, Stanford University. His Latest book, Civilization: The West and the Rest, will be published in November.
Let’s take a pause from the cascade of negativity on this day of thanks and be grateful that 90 percent of Americans have jobs—and that we’re not Europe, says Zachary Karabell.
As we turn to Thanksgiving, let us a pause for a moment and take a time-out from the storm of gloom that has descended across this land and so many others. If you pay even passing attention to politics, to the economy, to Wall Street, or to public sentiment, you know the mood is bleak. The litany of woes is well known—ranging from a sclerotic and debt-plagued Europe to a dysfunctional Congress to a possibly slowing China to high unemployment and widespread dissatisfaction with an economic system of uneven rewards. It is enough to make Agnewesque nattering nabobs of negativism proud.
The cascade of negativity, however, is starting to detach from the lived reality of many, many millions—and I don’t mean the 1 percent tucked away in gated communities surrounded by the tumbleweeds of foreclosure. There is much to be thankful for, and all is not as bad as it seems.
First, for Americans, we can be thankful that we are not Europe. This is not a gratuitous dig at European problems, which if they become much more severe will most certainly be our problems. It is, however, a recognition that the task facing Europe is much more complex than whatever challenges America faces. Americans have both the material question of how to sustain affluence and the existential one of what America is to be in a post-American world. But we do at least have one currency and one government, however inept it is. Europe is engaged in a multi-decade experiment to weave together disparate nations that share anything but a warm and fuzzy collective history, and trying to do so now under financial duress. Let us hope they succeed and give thanks that we are not them.
We can also be thankful that about 90 percent of Americans have jobs, 90 percent are current on their mortgages, and 90 percent are current on their credit-card payments. Yes, many of those jobs are poorly paid and deadening, agreed and acknowledged. But contrary to the common refrain, the vast majority of Americans take on debt they can afford, within their means, and work hard to create lives for themselves and their families. This is not a statistical portrait of a profligate people or of a nation drowning in debt.
And we can give thanks that the numerical construct called the “U.S. economy” is growing slightly rather than contracting mightily, and that unemployment remains structurally high but is not getting structurally higher. Solving a structural problem requires time and space, neither of which exists when the system is shedding jobs by the millions, as it was in 2009. While our political class has demonstrated little aptitude for addressing these issues, the American economy at least is stable, even as it remains troubled.
There are also pockets of innovation and imagination that continue to amaze and intrigue, with a particularly high concentration in Silicon Valley. Apple is only the most noticeable exemplar. And though the economic virtue of social media has yet to be demonstrated, the combination of venture capital and thousands of startup companies trying to give people the tools to reduce energy consumption or find the latest app to fit their needs is a potent one. The problem is that there aren’t more such pockets, but we at least should celebrate those we have.
We also can recognize that for the world as a whole, this remains the most robust period of wealth creation and poverty annihilation the human race has ever known. From the engine that is China to swaths of sub-Saharan Africa that are finally emerging from their decades of despair, from the favelas of Rio to the teeming apartment blocks of Mumbai to the tumultuous changes of the Arab Spring, much of the world has moved beyond the United States and Europe and is shaping its own destiny.
The vast majority of Americans take on debt they can afford, within their means, and work hard to create lives for themselves and their families.
Carolyn Kaster / AP Photo
While Americans at times seem at sea in the midst of these changes, it is a world that generations of Americans strove to create, a world where ideas, goods, and, yes, money flow relatively freely. The downside is greater systemic risk; the upside is an explosion of energy and growth. The downside is relentless pressure on wages in the affluent world and real strains on the environment; the upside is the demonstrable ease of producing food, goods, and diversion on an unprecedented scale. None of this is perfect, far from it, and we all know the problems. But we live in a dynamic era, though you wouldn’t know that listening to the grim words and watching the grim faces of the denizens of the old capitals of the world, in Washington, Berlin, Tokyo, Paris, and London.
So as financial markets roil and dance on the edge, and as the political season shines bright lights on all that ails us, as Europe engages in a slow-motion train wreck that is still likely to end well short of our worst fears, in the real world of real people, much of this is both abstract and unreal. The anxiety is ubiquitous, but most people are simply going about their lives, striving and often succeeding in a world that is far less dire than our daily dose of commentary would suggest.
President Obama and other politicians are advocating higher taxes, with a particular emphasis on class-warfare taxes targeting the so-called rich. This Center for Freedom and Prosperity Foundation video explains why fiscal policy based on hate and envy is fundamentally misguided. For more information please visit our web page: www.freedomandprosperity.org.
Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies at Harvard University and Senior Fellow at the Cato Institute. Miron blogs at JeffreyMiron.com and is the author of Libertarianism, from A to Z.
What is the “fair” amount of taxation on high-income taxpayers?
To liberals, the answer is always “more.” Liberals view high income — meaning any income that exceeds their own — as the result of luck or anti-social behavior. Hence liberals believe “fairness” justifies government-imposed transfers from the rich to everyone else. Many conservatives accept this view implicitly. They oppose soak-the-rich policies because of concern over growth, but they do not dispute whether such policies are fair.
But high tax rates on the rich are not fair or desirable for any other reason; they are an expression of America’s worst instincts, and their adverse consequences go beyond their negatives for economic growth.
The liberal hatred of the rich is a minority view, not a widely shared American value.
Consider first the view that differences in income result from luck rather than hard work: some people are born with big trust funds or innate skill and talent, and these fortuitous differences explain much of why some people have higher incomes than others.
Never mind that such a characterization is grossly incomplete. Luck undoubtedly explains some income differences, but this is not the whole story. Many trust fund babies have squandered their wealth, and inborn skill or talent means little unless combined with hard work.
But even if all income differences reflect luck, why are government-imposed “corrections” fair? The fact that liberals assert this does not make it true, any more than assertions to the contrary make it false. Fairness is an ill-defined, infinitely malleable concept, readily tailored to suit the ends of those asserting fairness, independent of facts or reason.
Worse, if liberals can assert a right to the wealth of the rich, why cannot others assert the right to similar transfers, such as from blacks to whites, Catholics to Protestants, or Sunni to Shia? Government coercion based on one group’s view of fairness is a first step toward arbitrary transfers of all kinds.
Now consider the claim that income differences result from illegal, unethical, or otherwise inappropriate behavior. This claim has an element of truth: some wealth results from illegal acts, and policies that punish such acts are appropriate.
But most inappropriate wealth accumulations results from bad government policies: those that restrict competition, enable crony capitalism, and hand large tax breaks to politically connected interest groups. These differences in wealth are a social ill, but the right response is removing the policies that promote them, not targeting everyone with high income.
The claim that soaking the rich is fair, therefore, has no basis in logic or in generating desirable outcomes; instead, it represents envy and hatred.
Why do liberals hate the rich? Perhaps because liberals were the “smart” but nerdy and socially awkward kids in high school, the ones who aced the SATs but did not excel at sports and rarely got asked to the prom. Some of their “dumber” classmates, meanwhile, went on to make more money, marry better-looking spouses, and have more fun.
Liberals find all this unjust because it rekindles their emotional insecurities from long ago. They do not have the honesty to accept that those with less SAT smarts might have other skills that the marketplace values. Instead, they resent wealth and convince themselves that large financial gains are ill-gotten.
Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies at Harvard University and Senior Fellow at the Cato Institute. Miron blogs at JeffreyMiron.com and is the author of Libertarianism, from A to Z.
The liberal views on fairness and redistribution are far more defensible, of course, when it comes to providing for the truly needy. Reasonable people can criticize the structure of current anti-poverty programs, or argue that the system is overly generous, or suggest that private charity would be more effective at caring for the least vulnerable.
The desire to help the poor, however, represents a generous instinct: giving to those in desperate situations, where bad luck undoubtedly plays a major role. Soaking the rich is a selfish instinct, one that undermines good will generally.
And most Americans share this perspective. They are enthusiastic about public and private attempt to help the poor, but they do not agree that soaking the rich is fair. That is why U.S. policy has rarely embraced punitive income taxation or an aggressive estate tax. Instead, Americans are happy to celebrate well-earned success. The liberal hatred of the rich is a minority view, not a widely shared American value.
For America to restore its economic greatness, it must put aside the liberal hatred of the rich and embrace anew its deeply held respect for success. If it does, America will have enough for everyone.
Runaway Spending, Not Inadequate Tax Revenue, Is Responsible for Future Deficits
The Top 10 Percent of Earners Paid 70 Percent of Federal Income Taxes
The Daily Hatch 
